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'If the economy continues to hold up well as we expect, interest rates could be rising rather sooner than the markets have been anticipating.' - Ruth Gregory, Capital Economics

British inflation surpassed the Bank of England's target of 2% last month, official figures released on Tuesday showed. The Office for National Statistics reported that consumer prices advanced 2.3% in February, following the preceding month's 1.8% increase and surpassing analysts' expectations for a 2.1% climb. Soaring inflation and the weak British Pound may force the Central bank to raise interest rates in the upcoming months. Last week, Kristin Forbes, an external member of the BoE's MPC, was the only one to vote for a rate hike at the March policy meeting. However, other members signaled they could step on the path of rate increases anytime soon if consumer prices continue rising and the economy maintains a strong foothold. Back in February, the annual rate of inflation in the UK rose above the BoE's target for the first time in more than three years, but the Governor Mark Carney claimed that it was important not to overreact to just one data point. Meanwhile, the core annual inflation rate came in at 2.0% in February, compared to January's 1.6% gain, while analysts anticipated an increase of 1.7%. The rise in both headline and core inflation was driven by the weak Pound, which also provided significant support to British manufacturers, making them more competitive in overseas markets.

AUD/USD – 0.7654

Recent wave: Wave 5 ended at 1.1081 and major correction has commenced for fall to 0.7000 and then towards 0.6500-10

Trend: Near term up

Original strategy :

Bought at 0.7645, Target: 0.7800, Stop: 0.7585

Position: - Long at 0.7645
Target:  - 0.7800
Stop: - 0.7585

New strategy :

Hold long entered at 0.7645, Target: 0.7800, Stop: 0.7585

Position: - Long at 0.7645
Target:  - 0.7800
Stop:- 0.7585

Although aussie has retreated sharply after marginal rise to 0.7750 yesterday and marginal weakness from here cannot be ruled out, reckon downside would be limited and as long as 0.7592 (previous resistance) holds, mild upside bias remains for another rise, above said resistance would extend gain to 0.7778 (last year’s high), however, break there is needed to retain bullishness and extend headway to 0.7840-50 but price should falter below 0.7900.

In view of this, we are holding on to our long position entered at 0.7645. Only below previous resistance at 0.7592 would abort and signal top is formed instead, then further choppy trading would take place and risk is seen for pullback to 0.7530-40 but indicated support at 0.7491 should remain intact.

On the 4-hour chart, the move from 0.8066 is the wave 5 with i: 0.8860, ii: 0.8315, wave iii is an extended move ended at 1.0183, iv: 0.9706 and wave v has ended at 1.1081 (also the top of entire wave 5). The subsequent selloff is the major correction which is unfolding as ABC-X-ABC and 2nd A leg has ended at 0.8848, followed by a-b-c wave B which ended at 0.9758, hence, 2nd C wave is now in progress and indicated downside target at 0.7000 and 0.6950 had been met, so further fall to 0.6710-20 cannot be ruled out.

'Canada's consumers started 2017 with their wallets poised for purchase.' - Erik Hertz, Bloomberg

Canadian retail sales rose more than experts estimated, following a decline in the previous month. In January, retail sales soared 2.2% to C$46 billion, which was the largest monthly advance since March 2010. Similarly, excluding the automotive sector, sales rose 1.7%. The largest spike of C$435 million happened in the motor vehicle and parts dealers sector. Furthermore, the health and personal stores sector registered a C$197 million increase in sales. Meanwhile, old and new car dealers posted an increase of 4.3% and 4.2%, accordingly. A 4.2% surge was also reported among other motor vehicle dealers. The largest increase of sales occurred in the jewelry, luggage and leather goods stores sub-sector, which posted a 17.2% gain. However, it was not enough to offset the overall slip in the clothing sector in December. Sales at gasoline stations continued showing steady growth for the seventh consecutive month. Meanwhile, sales in general merchandise stores increased for the first time in the last three months. In addition, e-commerce sales advanced 17.2% an annual basis, accounting for 2.7% of the total retail sector. Analysts suggest that the Canadian economy performed well in the Q1 of 2017 and is expected to maintain momentum.

'For the market to absorb the extra volume available and to pay a higher price for it is an outstanding result and a complete turnaround from a fortnight ago.' - Susan Kilsby, AgriHQ

Dairy product prices rose unexpectedly at the latest Global Dairy Trade auction, official data showed. The GDT Price Index advanced 1.7%, following a 6.3% fall at the prior auction and surpassing analysts' expectations for a 6% drop. The rise was mainly driven by a 2.9% price rise in whole milk powder. Overall, whole milk powder was sold at an average price of $2,855 per tonne, despite a 9.7% increase in supply. The price of skim milk powder dropped 10.1%, while prices for butter posted a 4.9% rise. The price of anhydrous milk advanced 3.0%, whereas prices for rennet casein climbed 3.6%. Prices for cheddar and lactose fell 1.0% and 2.7%, accordingly. Yesterday's auction followed two consecutive declines in the GDT Price Index with a 3.2% fall posted at the end of February and a 6.3% decline registered two weeks ago. Dairy product manufacturers reported that demand for skim milk powder remained low, pointing to growing inventories in Europe and other parts of the world. Analysts state that prices for dairy products are mainly driven by market sentiment rather than some fundamentals. Therefore, Tuesday's auction marked 'a real turnaround in attitude'. After the release, the New Zealand Dollar hit its two-week high of 0.7087 against its US counterpart.

Yen crosses have moved lower with equities, commodities and a weaker US Dollar. But it is the GBP/JPY that may be hinting that a major move in FX is about to happen.

What a difference a day makes it seems, as overnight the entire world appeared to throw the Trump reflation trade on the scrap heap. The catalyst appears to have been Obamacare and the difficulty he is having getting that repealed. The vote tomorrow on this hangs in the balance. The logic follows that if he can't get this repealed with Republican majorities in both houses, and his “border control adjustments” keep getting knocked back as unconstitutional by that annoyingly independent judiciary, what hope then off this fabled tax reform and infrastructure spending?

With the first 100 days of action quickly becoming 100 days of inaction, the street seemed to have an epiphany last night and headed for the door. To be fair, I think this has as much to do with positioning as it does with politics. The street having thrown the kitchen sink at the Trump tax/reflation trade since the start of the year. The warning signs have been there since last week's FOMC in the shape of a weaker USD pretty much across the board. Last night's sell-off continued that theme, only this time it was equities and base metals that rolled over, and bond yields marched lower. The USD continued its sell-off against everything except the commodity currencies.

The contest to be the ugliest horse in the glue factory continues today with equities a sea of red across Asia, Aud and NZD down and the USD lower against GBP, EUR and JPY to name but a few. The JPY as a high beta to U.S. yield differentials is of particular interest. Rallying aggressively against the USD since last week and this morning is nibbling at support around 111.50. But a look at the Yen crosses shows some very interesting price action indeed.

USD/JPY

USD/JPY is sitting just above crucial support today. A series of daily lows from the start of the year sit in this 111.40/60 region. More importantly, the 38.2% Fibonacci retracement is also nearby, just below at 111.15. Asia appears to have run out of the will to test this area in its session with USD/JPY having bounced slightly to 111.64.

However, a daily close now under these levels at say 111.00, would potentially open a move to the 50% retracement at 108.80.

Resistance lies above in the shape of the 55 and 100-day moving averages at 113.70 and 113.17.

EUR/JPY

More neutral than Switzerland at the moment, sitting in the middle of its year to date range. The rise in the Euro offsets the rally in the Yen against the USD. That probably implies that the Europe story isn't such a story to many in Asia, whereas the U.S. is. However, EUR/JPY is attacking its 100-day moving average at the moment at 120.52. A daily close below here could see a move to first support at 120.00 with a break here opening up a move back to the low 118's.

Resistance is at the descending short-term trend line at 121.65 and then the longer term trend-line at 122.70.

AUD/JPY

AUD/JPY has suffered a double whammy today as falling iron and copper prices mean the AUD is one of the few currencies to fall against the USD overnight. This has seen the AUD/JPY cross break below its daily Ichi moko cloud at 85.65 in Asian trading. The next support is 85.00, the 100-day moving average and a series of daily lows from early January. A close below this level opens up a possible technical move to 83.70, the low of the 29th December after which the chart has a lot of clear air.

Resistance comes in the shape of the top of the daily cloud and the 55-day moving average both at 86.35. Following this is a quadruple top at 87.50 and then February's high at 88.20.

The daily RSI offers no relief for bulls either being sat just below 50.

NZD/JPY

In much the same boat as the AUD, suffering from softer global commodity prices. The NZD has the extra flavour of an RBNZ rate decision tomorrow morning. Softer data recently may mean the RBNZ is a bit more dovish than the market is expecting. The timing would be perfect given their favourite hobby is talking the Kiwi down.

The NZD/JPY crossing has tested its 38.2% retracement at 78.24 before a dead cat bounce to 78.50. A daily close under this important level opens up 78.00 initially and then the 200-day moving average at 77.24. Some respite could be temporarily found in the RSI which is moving towards oversold levels.

Resistance is at 79.60, a double top, followed by 80.10 and then the 100-day moving average at 80.46. This region is also the 23.6 retracement and a series of daily lows and is now major resistance on the chart.

GBP/JPY

This chart ranks as my scariest of the day as I struggle to recall ranges as compressed as these on the GBP/JPY cross over a multi-month time frame.

I am interpreting this as an almost symmetrical triangle meaning that a substantial break is coming as we move to the apex. The problem being that the break when it comes can move either up or down, and technically by the length of the base of the triangle. In this case, I am interpreting that as the 15th December high at 148.45 to 135.45, the baseline of the same date. So that is 13 big figures!

In a nutshell, when this triangle breaks, as it must very shortly, the targets will be either 122.65 or 153.00 give or take on a technical basis. I know not which way the break will come. Perhaps the chart is telling us that GBP itself is about to have a massive rally as we head to official Brexit? Or maybe that USD/JPY is destined for much lower levels as is GBP/USD?

Conclusion

Equities have now followed the USD correction, and the U.S. bond market as Trumphoria give way to Trumpointment. USD, in particular, is suffering against the Japanese Yen and this, in turn, has set up bearish technical pictures on some very important Yen crosses.

Perhaps the best indicator of the next significant move in the short term could be GBP/JPY, where unusually compressed ranges in a symmetrical triangle pattern, hint that a very large movement may be about to happen.

The Aussie is in red for the second day and extends pullback from double upside rejection at 0.7747.

Tuesday's close in red that formed Bearish Engulfing reversal pattern and slow stochastic reversal from overbought territory, generated bearish signal for today's extension below pivotal support at 0.7649 (Fibo 38.2% of 0.7489/0.7747 upleg).

Overall bullish structure sees current pullback as correction, which is expected to end above top of rising thick daily cloud at 0.7597, to keep bulls in play for fresh attempts higher.

Conversely, penetration into daily cloud may sideline bulls in favor of deeper correction. Daily close below 0.7588 (Fibo 61.8% of 0.7489/0.7747 upleg) is expected to signal top at 0.7747 and further easing.

Res: 0.7687, 0.7735, 0.7747, 0.7758
Sup: 0.7626, 0.7597, 0.7588, 0.7550

The pair eventually broke below key near-term support at 111.60 zone (07/28 Feb lows) on extension of bear-leg from 115.49 that extended into seventh straight day in red.

Today's probe below 111.60 handle cracked next supports at 111.38/34 (top of weekly cloud / Fibo 38.2% of 99.82/118.65 rally), signaling further weakness on clear break lower.

Daily MA's (10/20/30/100 SMA) have converged in attempt to form multiple bear-cross, along with daily Tenkan-sen / Kijun-sen lines.

Focus is turning towards next targets at 110.21 (Fibo 138.2% projection) and psychological 110.00 support, however, thick weekly cloud that marks significant support may delay bears.

Also, strongly oversold slow stochastic and daily RSI approaching oversold territory, suggest some consolidative / corrective action in the near term, but no reversal signal seen so far.

Broken 111.60 base now acts as initial resistance, ahead of Tuesday's high at 112.85.

Res: 111.60, 111.77, 112.57, 112.85
Sup: 111.21, 111.00, 110.21, 110.00

Late during the US session today, market participants are likely to turn their attention to the RBNZ rate decision. Expectations are for no change in policy. At its latest gathering, the Bank retained its easing bias despite improving domestic economic data. Policymakers indicated that numerous uncertainties persist, particularly in the global outlook, and that policy may need to adjust accordingly. As was later explained by Governor Wheeler, this was a reference to the risks surrounding exports and the prospect of increased global protectionism. These concerns may have been amplified further last week given that the G20 finance leaders dropped their commitment to resist trade protectionism. Importantly, the RBNZ also reiterated that a decline in the Kiwi's exchange rate is needed, something that became reality following the Bank's cautious signals. Since that gathering, economic data have been lackluster. Although the nation's terms of trade improved in Q4, GDP growth slowed notably in the quarter, much more than the RBNZ's own forecasts. To make matters worse, economic growth for Q3 was revised lower. Bearing also in mind that the aforementioned protectionism risks remain elevated, we see the case for the RBNZ to retain its cautious stance and leave the door open for further easing. Something like that could bring the Kiwi under renewed selling interest.

NZD/USD traded lower yesterday after it hit the downtrend line taken from the peak of the 7th of February. However, the slide was stopped by the 0.7015 (S1) barrier. Bearing in mind that the pair is trading below the aforementioned downtrend line, we would consider the short-term outlook to be negative. A more-cautious-than-previously RBNZ tonight could encourage the bears to push the rate below the 0.7015 (S1) level and perhaps set the stage for our next support of 0.6970 (S2). Such a break would also signal that the recovery started on the 14th of March was just a corrective phase.

UK inflation accelerates, but will the BoE scale back stimulus?

Yesterday, UK inflation data showed that consumer prices continue to accelerate at a rapid pace, with both the headline and the core CPI rates for February rising by much more than anticipated. Specifically, the headline rate overshot the BoE's 2% inflation target, while the core rate came in at exactly 2%. At the latest BoE gathering, some members noted that they would consider reducing stimulus should there be any further upside news on the prospects for growth or inflation, while Kristyn Forbes actually voted for an immediate hike. GBP/USD surged at the release, possibly as market participants brought forward their expectations with regards to a potential reduction in stimulus by the BoE. The surge brought the pair above the downside resistance line drawn from the high of the 2nd of February, which makes us confident that the recovery from near the key territory of 1.2100 may continue for a few more days. Now the rate is testing the 1.2500 (R1) level, but we prefer to wait for a break above 1.2525 (R2) before we assume the extension of yesterday's rally. A move above 1.2525 (R2) could open the way for the 1.2580 (R3) hurdle. As for the broader picture, although we expect some more upside in the near term, as long as the rate stays within the sideways range between 1.2100 and 1.2850, we consider the medium-term outlook to be neutral.

As for the Bank, although market expectations with regards to a hike may have come forth, we are not convinced that such an action will occur in coming months. We believe that accelerating inflation is indeed likely to lead to more hawkish BoE dissents, but we don't expect a consensus for a hike mainly because we consider it unlikely that the Bank will rush into any policy move before the Brexit negotiating landscape becomes clearer. This view is amplified by Governor Carney, who indicated yesterday that the BoE should not overreact to a single data point, referring to the CPIs. Having said all these though, we think that the decision of whether to reduce BoE stimulus will ultimately depend on how fast UK inflation will accelerate in coming months. A rapidly rising inflation rate is likely to overshadow political considerations we believe.

Safe havens rally as risk aversion prevails

Risk aversion was evident across financial markets yesterday, with safe haven assets rallying, while riskier assets, such as equities, tumbled. Even though the fundamental catalyst behind the move is not clear, a possible reason may be speculation that US President Trump's much-awaited tax reform could be delayed even further. Specifically, a few weeks ago Trump pledged to deliver a comprehensive tax plan, but only after he repealed and replaced the Affordable Care Act (Obamacare). However, the latest signals from Congress suggest that there is widespread opposition to the proposed replacement of Obamacare among both Democrats and Republicans. The vote for Trump's replacement plan is due to take place on Thursday. If Trump loses the vote tomorrow, we expect to see similar market reactions as uncertainty around US fiscal policy heightens. Namely, we expect further pullback in equities as well as increased flows into safe haven assets.

As for the rest of today's highlights: During the European day, the economic calendar is relatively light, with only second-tier indicators on the agenda. We get Norway's AKU unemployment rate and Eurozone's current account balance, both for January, though neither of these is usually a major market mover.

From the US we get existing home sales for February and expectations are for the figure to have ticked down from the previous month.

We have one speakers on the schedule: ECB Executive Board member Sabine Lautenschlager.

NZD/USD

Support: 0.7015 (S1), 0.6970 (S2), 0.6945 (S3)

Resistance: 0.7075 (R1), 0.7110 (R2), 0.7170 (R3)

GBP/USD

Support: 1.2435 (S1), 1.2340 (S2), 1.2300 (S3)

Resistance: 1.2500 (R1), 1.2525 (R2), 1.2580 (R3)

'The only thing holding global fund managers back from Europe is Marine Le Pen.' – Wayne Gordon, UBS (based on Bloomberg)

Pair's Outlook

During the early hours of Wednesday's trading session the common European currency against the Greenback fluctuated just below the weekly R1, which is located at the 1.0814 level. The weekly resistance is strengthened also by the 38.20% Fibonacci retracement level at 1.0826. The currency pair surged on Tuesday and gained almost 0.7%. Due to that factor it can be assumed that this is a minor consolidation of positions before the surge continues. It is possible that the rate retreats back down to the monthly R1 at 1.0772 before it attempts to break the before mentioned resistance levels.

Traders' Sentiment

SWFX sentiment remains bearish, as 61% of open positions are short on Wednesday. Moreover, 55% of trader set up orders are to sell the Euro.

'It's probably going to take some sort of meaningful change in expectations around monetary or fiscal policy to revive the dollar and set it back on a strengthening trend.' – Erik Nelson, Wells Fargo (based on Reuters)

Pair's Outlook

The strong UK inflation data yesterday helped the British currency to strengthen further against the US Dollar, ultimately causing the nine-month down-trend to be pierced. Trade even managed to close above the monthly pivot point, but that does not necessarily mean that support will be sufficient for another leg up. In case bulls retain the upper hand, the pair could easily overcome the 1.25 major level, with the main target shifting to 1.2672, namely the 23.60% Fibo. However, technical indicators remain mixed, thus, the Cable still risks undergoing a corrective decline, but with the 1.24 mark expected to be intact.

Traders' Sentiment

There are 60% of traders being long the Sterling today, compared to 67% on Tuesday. At the same time, 53% of all pending orders are to acquire the Pound (up from 50% yesterday).